Understanding Loan TerminologyThere is one thing more painful than learning from mistakes (our own or somebody else's):  Not learning from them. - Barbara Johnson
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Understanding Loan Terminology

Understanding Loan Terminology

Before you apply for a loan, it's a good idea to become familiar with loan terminology. The more knowledge you have, the better off you will be and the better deal you can make. Here are some important terms to know.

Annual Percentage Rate (APR)


Lenders charge interest on the amount you borrow, which is referred to as the Annual Percentage Rate (A.P.R.) The APR is the yearly rate of interest that includes the one-time fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR before the loan is finalized . Compare the APRs of different loans to determine how competitive they really are.

Lenders quote interest rates in different ways, and it's important to understand the difference before you start the loan process :

A fixed interest rate will not change throughout the term of the loan, regardless of any changes in the bank base rate. This means your monthly repayments should always stay the same, allowing you to budget for the payment.

A variable interest rate (also known as an adjustable interest rate) may rise and fall with changes to the bank base rate. This could result in your monthly payments changing several times during the term. The change is usually tied to a change of an outside indicator, for example the prime interest rate. There is often a floor and ceiling to your rate which means it can't go below or above those specified rates.

It's important to shop around for the lowest APR. The APR for home equity loans and home equity lines of credit are calculated differently, so a side by side comparison can be difficult .

  • The APR for traditional home equity loans includes points and other finance charges.
  • APR for a home equity line of credit is based only on the periodic interest rate.

Watch Out!

Although the APR is a major factor that contributes to the cost of your loan, t he APR simply reflects the cost of the credit (including one-time fees). It does not take into account other costs that may be associated with the loan . There may be add-ons, such as:

Payment Protection (Credit) Insurance

Payments are protected in the event of illness, accident, unemployment and death. This insurance can help you in case the unexpected happens and will ensure your loan repayments are met, no matter what life has in store for you.

Prepayment Penalty

Some lenders will add a fee if you repay the debt in full before its end date . Prepayment penalties can run between 2% to 4% of your loan amount. If you think you'll pay off the debt before the end of the loan term then your best bet will probably be a loan with no prepayment penalty , even if the APR is slightly higher. Before you sign on the dotted line, find out all the details about any prepayment penalty which may apply to your loan.



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